Chinese Economy Weakens, Yuan Expected to Fall

After two weeks of recovery, the Chinese yuan is expected to fall after further data shows Asia’s largest economy continues to slow. Production in China’s industrial sector rose just 5.4% in the first two months of 2016, a disappointment that has led many analysts to warn that the country’s new sub-7% GDP growth target is still too optimistic.

The data comes shortly after exports from China fell 25.4%, an indicator of weak demand throughout the global economy. Retail sales rose less than expected, at just 10.2%, indicating that China’s shift to a domestic consumer-driven model for growth is suffering setbacks.

Little Government Support

Despite the mounting weakness in the Chinese economy, People’s Bank of China (PBOC) governor Zhou Xiaochuan said last weekend that the Chinese central bank would not enact significant interventions to help the Chinese yuan or the Chinese economy. This has encouraged significant selling pressure on the yuan, with one Chinese currency brokerage stating that foreign demand to bet against the yuan has increased significantly.

For Xiaochuan’s part, the Chinese currency is now trading in a “normal, rational and fundamentals-driven” trend. The currency’s current level, at around 6.49 to the U.S. dollar, has also emboldened the PBOC to ease back on enacting further monetary stimulus. Xiaochuan said that China would not need stimulus to achieve its growth target, even after government bond yields fell on the week’s industrial output and retail sales data.

Surprising Japanese Strength

Japanese stocks started the week strong and some analysts have argued more strength is likely to come for the week, thanks to a surprising rise in machinery orders.

Orders for industrial machines rose 15% in January on a month-over-month basis, far ahead of expectations. The surprising increase also indicates that Japanese industrial customers, both at home and abroad, are kick-starting capital spending, which could eventually translate into larger GDP growth for Japan.

While the Japanese industrial sector is showing strength, regional banks in Japan are beginning to feel the pinch from the Bank of Japan’s negative interest rate policy, or NIRP. This policy, which has allowed 10-year Japanese bond yields to fall below 0%, means creditors are paying the government to borrow money. Already nearly 70% of government bonds have a yield at or less than 0%, and Bank of Japan governor Haruhiko Kuroda said the central bank is going to stick to NIRP in an attempt to encourage banks to lend to businesses and individuals throughout the country.

In theory, this push to lend will encourage more investment and spending, thereby lifting Japan’s GDP. In reality, actual lending fell in February and deposits have risen, meaning that Japanese banks are failing to lend more money despite the cost of holding government bonds. Additionally, indicators of both consumer and retailer sentiment fell last month after the country’s GDP fell in the fourth quarter of 2015. Critics point to this data to suggest ZIRP is not working.

Chancellor of the Exchequer of the United Kingdom from 1992 to 2007. Prime Minister of the UK between 2007 and 2010. Inaugural 'Distinguished Leader in Residence' at New York University. Advisor at World Economic Forum